Sanctions on Russia Failed Because of Chinese Manufacturing
U.S. and European sanctions aimed to collapse the Russian economy. Alongside technocratic preparation and sanctions evasion, imports of advanced manufactured goods from China neutered this strategy.
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Immediately following the Russian invasion of Ukraine in February 2022, the United States imposed sweeping financial and economic sanctions on Russia, and was joined in doing so by the European Union, United Kingdom, Japan, South Korea, Taiwan, and the entire rest of the U.S.-aligned developed world. Practically overnight, this bloc, representing over a billion people and almost 60% of the global economy as measured by nominal GDP, cut Russia off in terms of basic financial systems, corporate business activity, and trade of advanced manufactured goods or critical materials.1 The EU effectively banned oil and coal imports from Russia and declared its intent to transition off of Russian gas imports, with those falling by 71% from 2021 to 2023.2 Airspace and travel were restricted, while well over a thousand high-ranking or wealthy Russians were personally sanctioned as well.3 Despite these comprehensive measures, the Russian economy has not collapsed in the two years since.
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The purpose of the sanctions was threefold. By ending imports of Russian hydrocarbons, the U.S. and Europe hoped to limit the Russian government’s ability to fund the war. By banning exports to Russia of a long list of goods, especially advanced manufactured goods, they hoped to prevent the Russian defense industrial base from acquiring key components and materials needed for weapons manufacturing. By imposing various other sanctions and restrictions on Russian individuals, firms, or just commerce with or in Russia by others, they hoped to create both popular and elite political pressure on Russian President Vladimir Putin to end the war, or, alternatively, to help organize a domestic political coalition that could replace Putin outright.
Despite the ambitious goals and wide range of the sanctions, to date they have failed to achieve their stated goals. In GDP terms, the Russian economy is currently outperforming major developed countries. According to the International Monetary Fund (IMF), Russia’s economy contracted by 1.2% in 2022, but then grew by 3.6% in 2023.4 Russian production of tanks, missiles, and artillery shells has apparently ramped up from pre-war levels, while the Russian population at large has not seen a notable drop in living standards.
The relative failure of the sanctions is due to a number of factors. For one, widespread sanctions evasion has been occurring, most likely on a scale unprecedented in history, with India, Turkey, and a long list of other countries almost certainly acting as intermediaries for exports of Russian hydrocarbons to third countries or for imports of U.S. and European goods to Russia. Although they miscalculated their severity, the Russian government’s economic and financial bureaucracies had also prepared for an additional wave of sanctions for years due to impositions of sanctions following the 2014 annexation of Crimea by Russia, thus blunting the financial fallout of the more recent sanctions.
But most importantly, the existence of a vast and advanced industrial base in China—which has not sanctioned Russia—has simply given Russia an alternative supplier for nearly any component or manufactured good it has lacked due to sanctions from the U.S., Europe, Japan, Taiwan, and South Korea. So long as China does not sanction Russia, it will not be possible to collapse the Russian economy through sanctions, only further increase its dependence on China’s vast manufacturing base.
U.S. and European Sanctions Aimed to Collapse Russia’s Economy
In the immediate aftermath of the impositions of sanctions, economists expected a dramatic decline in Russia’s economic output. In April 2022, for example, both the IMF and S&P Global forecasted an 8.5% annual decline in Russia’s GDP.5 French finance minister Bruno Le Maire described the sanctions package as “extremely effective” and predicted that they would cause the collapse of the Russian economy.6 Two months after the war began, U.S. President Joe Biden said that the sanctions would cause a recession so severe that Russia’s previous fifteen years of accumulated economic growth would be wiped out, while Biden administration officials predicted on the record that Russia would regress to 1980s living standards.7 Expectations of the effects of the sanctions were, at the outset, very high.
These expectations were set by the breadth and depth of the sanctions. Financial sanctions primarily targeted the foreign exchange reserves of the Russian central bank. Around half of the central bank’s reserves, approximately $300 billion in total, were held “in the West” and have been frozen since the war’s outbreak.8 As of March 2024, active discussions continue around seizing the assets permanently and using them to fund the Ukrainian government, but no consensus has yet been reached. In addition, much of the Russian banking system was ejected from the Belgium-based global interbank payment messaging system, SWIFT, which allows banks to smoothly execute transactions between each other. Although by itself this measure did not stop any global payments, it did add substantial friction to any attempts by Russian firms to buy or sell products from abroad.
The most consequential economic sanctions targeted Russia’s hydrocarbon exports, a key income source for the Russian state. Russia is the world’s second-largest gas exporter and is also the world’s second-largest oil producer, second only to the United States. Oil and gas revenues constituted 45% of the Russian federal budget for 2021.9 While the U.S. and United Kingdom have banned all imports of Russian oil, gas, and coal, the EU has only outright banned coal, roughly 90% of oil imports from Russia, and has not banned gas imports at all, though individual countries like Poland and Lithuania have.10
Pipeline gas imports from Russia to Europe have continued to transit Ukrainian pipelines despite the war, although total Russian gas imports have indeed fallen to less than a third of their pre-war levels, from 150 billion cubic meters (bcm) in 2021 to just 43 bcm in 2023.11 Russian gas has gone from over 40% of EU gas imports in 2021 to about 8% in 2023, as total EU gas imports have declined 13% in the same timeframe.12 Notably, much of this decline was driven by Russia cutting off its own gas exports to Europe in the hopes that higher energy prices would move European countries to stop supporting Ukraine.13 In September 2022, the Nord Stream gas pipeline from Russia to Germany, the largest customer for Russian pipeline gas, was mysteriously bombed. Russian gas still holds an approximately 15% market share in Europe due to increased LNG imports and some ongoing pipeline supply.14
In September 2022, the U.S., Japan, and other major European economies agreed to introduce a global price cap on Russian oil, targeting a level of $60 per barrel of crude. The price cap relies on the fact that much of the global shipping and maritime insurance industries are based in the countries participating in the price cap. Shipping and insurance firms based in these nations are now legally barred from providing services to Russian oil cargoes unless they can demonstrate that the oil was purchased at or under the price cap. Different price caps exist for various petroleum products, with the highest level of $100 per barrel set for petroleum products that typically trade at a premium to crude.15
Coupled with these attempts to cap the Russian state’s revenues, export controls were imposed to limit its ability to import key components required for domestic industry, especially military manufacturing and the hydrocarbon sector. Over the course of 2022, waves of the EU’s export controls blocked the sales of a wide range of aviation equipment, advanced semiconductors, integrated circuits, oil refining equipment, broader energy industry equipment, drones, and a range of chemicals, lithium batteries, and luxury goods.16 The U.S. Department of Commerce has similarly published a “Common High Priority Items” sanctions list of especially vital components for Russian defense manufacturing, primarily consisting of electronics, metalworking equipment, ball and roller bearings, cameras and optical devices, and radio equipment.17 Russia largely lacks domestic semiconductor and electronics industries, which were one of its largest dependencies on U.S.-aligned countries prior to the war.
Though these goods export controls were the most economically consequential, the U.S. and EU also prohibited the sale of auditing, legal, and consulting services to the Russian state and Russian firms. Russian airlines are banned from the U.S. and EU. The final component of the sanctions regime were those imposed on individuals. As of March 2024, the EU’s list of sanctioned persons connected to the Russian state has 1718 names on it, of both individuals and entities, many of them political or media figures not directly involved in the war.18 The U.S. and U.S.-aligned governments have repeatedly frozen the foreign assets of these individuals, especially property such as yachts. No political consensus has yet been reached as to the seizure and sale of these assets, but they and any cashflows they generate remain inaccessible to their owners.
Russia Can Engineer Finances and Replicate Bureaucratic Systems
Despite the range and ambition of the sanctions, they do not appear to have had the desired effect on the Russian economy or the Russian defense industry. On the whole, the total value of all Russian hydrocarbon exports has nearly halved since January 2022, as the previously vast pipeline exports to Europe cannot be redirected.19 Chinese purchases of Russian coal rose 20% in 2022 and gas imports rose 150%, across both pipelines and liquefied natural gas (LNG), but these are well under half of the previous 155 bcm in pipeline exports to Europe, with the one Russia-China pipeline projected to reach full capacity of 38 bcm only by 2025 and the construction of a second pipeline still being negotiated.20
But counterintuitively, the Russian government’s hydrocarbon revenues have barely budged. In 2022, although Russian oil and gas export volumes fell, the Russian state saw a fiscal windfall from the effect of selling at higher prices, caused in part by its own decision to cut gas flows to Europe. In 2022, the state’s income from hydrocarbon sales increased by almost 30% from the 2021 level.21 The 2023 oil and gas revenues are only 2.6% lower than the 2021 revenues as measured in Russian rubles and still substantially higher than almost every year going back to 2006.22 The total export value of all hydrocarbons in 2023, though lower, is still on par with the fluctuating annual export values of hydrocarbons from 2015 to 2020.23
This is explained partly by the fact that oil and gas prices have remained elevated since 2022—in the case of oil in part due to Russia’s cooperation with Saudi Arabia and other oil producers in the OPEC oil cartel to cut production levels—and partly by the fact that Russia has simply found more big customers for its oil. As of December 2023, China, Turkey, and India are now all larger importers of Russian hydrocarbons, primarily oil, than the EU.24 India in particular has increased its imports of Russian oil by an order of magnitude compared to 2021, with Russian oil going from 2% to 30% of its domestic demand, while Russia has surpassed Saudi Arabia as the top oil exporter to China.25 Since oil remains one of the few truly globalized energy sources, sanctions merely shift which countries exporters sell to, unless all major oil importers agree. In short, while Russia has sold a lot less gas since the outbreak of war, it has nonetheless made roughly the same amount of money as before.
Russia’s military manufacturing statistics are closely-guarded secrets, but both U.S. and Ukrainian sources estimate that Russian ballistic cruise missile production has increased from a few dozen missiles per month to over one hundred per month.26 Stockpiles of the Iskander ballistic missile, for instance, are thought to have increased over the course of 2023, despite ongoing use of the missile in the war.27 It is less clear how many newly-built tanks Russia is producing, but the British Ministry of Defense estimates that its defense industry can currently manufacture about 100 tanks per month, although many of these are refurbished and modernized vehicles brought out of storage.28 The Estonian defense ministry similarly estimates that Russian production of artillery shells has more than tripled and will rise further in 2024.29 Despite this increase, Russia’s military production is estimated to be significantly short of making up for its high consumption of military materiel on the battlefield, but, conversely, it has not declined since the start of the war due to sanctions either.
The IMF estimates that the Russian economy suffered a relatively small recession in 2022 of 1.2%, but returned to strong growth in 2023. At 7.6%, inflation is about double the Russian central bank’s target of 4%. This high inflation rate rate is however well within Russia’s norm and is unlikely to prove economically unsustainable or trigger widespread unrest, especially since the central bank has maintained high interest rates to keep inflation under control. The IMF’s growth estimate relies partly on official Russian statistical data, which could be manipulated for propaganda purposes. There are reasons to think it credible since theoretically a massive government fiscal stimulus via military spending should drive both growth and inflation higher. Furthermore, the harder-to-fake official data on electricity generation and energy consumption appear to be compatible with the IMF’s GDP growth estimates.30
An important aspect of Russia’s economic stability in the face of sanctions was the preparedness of the Russian government’s economic and financial bureaucracies. In Russia, economic policymaking is entrusted to a small set of technocrats divorced from the usual intelligence and security apparatus that Putin himself emerged from and which has often dominated other areas of Russian society. The central bank governor, Elvira Nabiullina, has served since 2013, and Putin has retained her in post over and above Sergei Glazyev, an economist who formerly served as an advisor to Putin and was reportedly the favored candidate of the security services for the role.31 Other examples of such powerful technocrats include Mikhail Mishustin, who headed Russia’s tax authorities for a decade before becoming Prime Minister in 2020, and Sergei Kiriyenko, who reformed Russia’s state nuclear corporation Rosatom and turned it into a major global exporter.
The existence of such technocrats, and their ability to steer institutions and even replicate bureaucratic systems used by the U.S. or Europe, is a bar for state capacity that the vast majority of states still cannot pass, which is why U.S. and European sanctions that target such financial and bureaucratic systems can be so effective. Nabiullina oversaw Russia’s recovery from the 2014 economic crisis caused by the fall in the price of oil and the effects of the first wave of sanctions against Russia following Russia’s annexation of Crimea. The country’s growth rate fell, capital outflows increased, inflation rose to over 11%, and the ruble lost half of its value against the U.S. dollar in less than two years. Nabiullina spoke publicly about the importance of insulating the Russian economy from sanctions over and above those imposed after 2014.32
In the aftermath, she successfully reduced inflation, then also ensured that Russian banks were better placed to withstand external shocks through a program of forced bank closures and recapitalization. Between 2013 and 2018, over 500 Russian banks lost their licenses, over a third of the total number of banks, centralizing assets at a fewer number of banks.33 The banking sector was also partly de-dollarized through the introduction of stricter regulatory requirements for banks with larger foreign exchange liabilities.34 The stronger banking sector that emerged from these measures was both better prepared for a large financial shock and more insulated against a sudden decline in the value of the ruble.
Nabiullina was also responsible for the development of Russia’s own interbank payment messaging system, SPFS, a domestic alternative to SWIFT developed explicitly to insulate the Russian banking system from the consequences of losing access to SWIFT. In addition to this measure, from 2017 onwards the central bank oversaw the rollout of the Mir consumer card payments network, an alternative to Visa and Mastercard, both of which suspended their operations in Russia in March 2022. Both SFPS and Mir have seen large increases in domestic uptake since the 2022 invasion. The number of Mir cards issued has grown from an estimated 113 million in December 2021 to over 256 million by late 2023.35
The Russian government’s financial stability was reinforced by Putin’s pre-war fiscal policy. In years of high oil prices, the state ran large budget surpluses, which it used to build reserves and pay down debt. By 2022, the debt-to-GDP ratio was just 15%. After 2014, the state implemented a new fiscal rule aiming for a balanced budget at a relatively low oil price of $40 per barrel. The rule dictated that any additional funds the state received from oil prices above this level would be transferred to the reserves. The result was that the state entered the war with a sovereign wealth fund of $130 billion and $600 billion in foreign exchange reserves. In essence, Russia saved up its oil profits for almost a decade and is now spending them to pay for the war.
In the immediate aftermath of the sanctions, Nabiullina both raised interest rates and imposed capital controls, and relaxed regulatory restrictions on bank lending. These measures also helped avert a rapid decline in the value of the ruble, which reached a seven-year high against the dollar by the summer of 2022, driven in part by high oil prices.36 Although the ruble has fallen in value since, as have global oil prices, in total it has lost only a little over 10% of its value against the dollar since the outbreak of the war.37 A stronger ruble itself partly mitigates the effects of sanctions insofar as it helps the Russian state import Chinese goods on more affordable terms.
China Replaced the Rest of the Developed World as a Manufacturing Exporter
The total value of Russia-China trade reached $240 billion in 2023, up by a quarter from 2022 and surpassing a goal of $200 billion set by the two countries.38 In 2021, the total trade value was roughly $140 billion.39 Chinese exports to Russia are up by 121% since 2021, compared to a 29% rise in exports to the rest of the world.40 Financially, the volume of Chinese exports to Russia more than makes up for the entire reported decline in European exports to Russia since the outbreak of the war. China has served as an alternative source of almost every manufactured good which otherwise would have come from Europe, North America, Japan, or South Korea.
Chinese automobile manufacturers now have 55% of the Russian market, up from just 8% in 2021.41 This is not just an artefact of an absolute decline in automobile sales: in 2021, sales of new cars in Russia reached 1.51 million, and after plummeting in 2022 have recovered to 1.06 million as of 2023 and are expected to climb to 1.25 million in 2024.42 From 2021 to 2023, Chinese exports of passenger vehicles to Russia have grown nearly eight times over, of tractors fifty times over, and of commercial trucks nine times over.43 Exports of bulldozers, forklifts, motorcycles, and other vehicles have also all multiplied. From 2021 to 2023, Chinese exports of household appliances like refrigerators and vacuum cleaners grew by about half, while exports of televisions and washing machines more than doubled.44
By the start of 2023, Chinese smartphone brands like Xiaomi and Realme made up 70-95% of the Russian smartphone market, up from 40-50% before the war as brands like Apple and Samsung pulled out of the country.45 Notably, however, Chinese exports of smartphones and computer hardware have not yet recovered from pre-war levels as measured in U.S. dollar value, falling by 13% and 32% respectively in 2022 and only slightly growing in 2023.46 Russian sources reported, however, that Russia imported 29.5 million Chinese smartphones in 2023, almost equivalent to the 2021 number of 30 million smartphones of any kind sold in Russia.47 It is unclear what explains this apparent discrepancy, but the initial drop was due to Chinese firms curtailing their sales and operations in Russia over fear of secondary sanctions by the U.S. and Europe.48
Exports of Chinese semiconductors and computer chips similarly initially dropped following the invasion, before sharply turning upwards to unprecedented heights, reaching eight times the 2021 monthly average in December 2022.49 Other estimates said China and Hong Kong together more than doubled semiconductor and chip exports to Russia from 2021 to 2022, apparently making up for all sanctioning countries.50 Russian banks have begun purchasing ATMs from Chinese companies, after their previous U.S. suppliers stopped servicing them.51
Chinese exports to Russia of alumina—the unrefined form of aluminum, a key metal across many industrial and military uses—grew one thousand times over from 2021 to 2022.52 Chemicals exports nearly doubled from 2021 to 2022, while plastics and rubber exports grew by nearly half.53 Total Chinese exports to Russia grew by another 54% from 2022 to 2023, with increases in almost every category including industrial equipment, vehicles, electronics, appliances, plastics, steel and iron products, telecommunications equipment, and even footwear and clothing.54
Some of the most vital imports have been of equipment and components useful to the Russian defense industrial base and war effort. According to Chinese customs data, Russia imported $115 million worth of Chinese drones just in the first half of 2023, more than enough for many tens of thousands of drones, depending on the model and price.55 In those same six months, Russia also imported over $100 million of thermal optics i.e. heat vision—a quintupling over the previous year—and $227 million of ceramics i.e. body armor and the materials to make it—which had risen 69% from the previous year.56
Chinese exports of ball bearings, vital for tank manufacturing, quadrupled compared to 2021 levels.57 Similarly, exports to Russia of very large trucks that weigh above 20 tons saw an eightfold increase.58 In April 2023, Ukrainian intelligence sources reported recovering Chinese navigation systems inside captured Russian Orlan drones, whereas earlier models of the drones had used a Swiss-origin system.59 Similarly, the fire control systems in Russian tanks had originally used some French components, but again Ukrainian sources noted a shift towards Chinese components in newer armored vehicles.
Importantly, none of these exports are of finished military goods made by Chinese defense manufacturers, but civilian exports of commercial “off the shelf” goods that Russian companies can use in military production, also known as “dual use” goods in military jargon. Officially, China is trying to stay neutral and avoid incurring secondary sanctions from the U.S. or Europe on itself. While major Chinese companies like Xiaomi, Alibaba, and Tencent have continued operating in Russia, others like Huawei, Lenovo, and even premier drone manufacturer DJI have limited or even suspended their sales and operations in fear of secondary sanctions.60
It is not that the Chinese government is intentionally sending shipments of tanks and shells to Russia’s military, in the way that the U.S. and European countries have sent their own tanks and shells to Ukraine, but simply that by having access to the products of civilian Chinese manufacturing, Russia is able to substitute apparently almost anything it has lost from sanctions. That said, there are also apparently Russian customs records showing that Chinese state-owned defense firms have in fact directly supplied Russian state-owned defense firms with spare parts for military transport helicopters, communications vehicles, and jet fighters as of late 2022.61 It is unclear what the magnitude of this is, and whether these are related to prior contracts, mistakes on the part of Chinese exporters, or evidence of state-to-state military support.
The growth of trade with China has also served to weaken the dominance of the U.S. dollar in Russian imports and exports. By the end of 2022, over 20% of Russian imports were invoiced in Chinese yuan, up from just 3% the year before. While most of this increased use of the yuan reflects the wider growth in Russia-China trade, Russia is also using the yuan as a currency to settle trades with third countries.62 The yuan is now the most traded currency on the Moscow Exchange.63
The financial sanctions regime is further weakened because payments denominated in dollars are typically cleared through the U.S. banking system, meanwhile payments denominated in yuan, Emirati dirhams, or Indian rupees are not.64 The long-term effects may be more significant than the short-term benefits of sanctions evasion if the yuan becomes a preferred currency for global trade, at least among currencies wishing to protect themselves against future U.S. sanctions. While such a shift would not weaken the U.S. economically, it would significantly constrain the impact of future sanctions, not just those imposed on Russia but those imposed on any country.
Too Big to Sanction
Sanctions on Russia have also been weakened simply due to widespread and fairly obvious evasion of sanctions in a multitude of countries by a multitude of firms and organizations, with the result that both declines in U.S., European, South Korean, or Japanese trade with Russia are most likely systematically overestimated and increases in Russian trade with China are most likely systematically underestimated. This phenomenon spans oil, gas, computer chips, industrial components, and practically every other category of trade one way or the other and is visible in suspiciously high post-2022 growth in trade in what are now middleman countries like India, Turkey, the United Arab Emirates, Kazakhstan, Georgia, and others, who re-export goods both ways to allow Russia, China, and Europe to avoid directly importing goods from each other in violation, in spirit or in letter, of sanctions.
For example, while Chinese exports of ball bearings to Russia quadrupled following the war, exports of ball bearings to Kyrgyzstan grew nearly 2500%.65 There is no doubt that these are then immediately re-exported to Russia. The re-exporting is often just visible in official figures: Kazakhstan imported $5.9 million of Chinese drones in 2023 and also exported $2.7 million of drones to Russia the same year, despite having no drone manufacturing industry.66 While direct European goods exports to Russia fell by 61% between February 2022 and September 2023, much of this decline was compensated for by a rise in exports to these middleman countries.67 German direct exports to Russia, for example, fell by $20 billion from 2021 to 2023, but German exports to Turkey alone rose by $12 billion over the same period.
While some of this increase might be a genuine rise in Turkish demand for German products, coupled with German exporters trying to find new customers to replace lost Russian business, a considerable fraction of the increase almost certainly represents sanctions evasion.68 Likewise, German exports to Kazakhstan had increased to $3.5 billion a year from just $1.5 billion two years before. In total, German exports to Central Asia and the Caucasus have risen by 72%, while U.S. exports to this region have also increased by 60%.69 In total, Russian imports of goods have actually increased by over $50 billion from the 2019 level, making it apparent that the attempt to cut Russia out of the world economy has failed.70
Similarly, while the oil price cap has had some effect on limiting Russia’s hydrocarbon revenues, Russia has been able to partly evade the price cap mechanism simply by buying its own tanker fleet, largely composed of elderly vessels bought at very low prices. Gatik Ship Management, an India-based firm, bought over sixty tankers in little more than a year and became one of the world’s top shippers of Russian oil.71 The company’s ownership remains unknown.72 India has also benefited from the sanctions regime by buying discounted Russian oil, refining it domestically, and then selling the refined petroleum products to Europe at full market prices. European imports of Indian-origin petroleum are up to 230,000 barrels per day: in 2021 it was under 100,000 barrels.73
While the individual transshipment volumes per middleman country are relatively small, when added up the volumes are very substantial and indicate an approximate leakage rate in the export controls of around 25-30%.74 The true leakage rate in the controls may well be higher still depending on assumptions about how much of the increases in trade represent sanctions evasion. Turkey appears to have become an especially key route for trade in high-priority dual-use goods such as microchips and optical sights. Turkish exports to Russia and its neighbors of these goods more than tripled in 2023 as compared to 2022, although declines have been registered in the first months of 2024 after visits to Ankara by U.S. officials, who have stated their intentions to identify and sanction middlemen and the countries which host them.75
This will however be an inevitable game of cat-and-mouse that is unlikely to ever result in complete success or perhaps even substantial partial success. U.S. officials cannot be everywhere in the world at once, but would need to secure not just lip service but the active cooperation and buy-in of enforcement authorities in a multitude of countries, most of which are already ambivalent about cooperating with U.S. foreign policy like China, India, and Turkey, or just likely lack the state capacity to enforce such sanctions at all, like Kyrgyzstan. Even should one set of middleman countries begin enforcing policy against sanctions evasion, there is no shortage of third countries in Africa, Latin America, Southeast Asia, and the Middle East that can supply a destination labeled something other than “Russia.” With a nominal GDP of $2.2 trillion, the Russian economy is more than five times bigger than the second-largest heavily-sanctioned country’s, Iran’s, and financial opportunism in evading sanctions will reflect that.76
At a secret meeting held a month prior to the outbreak of the war in Ukraine, Putin and his economic policymakers attempted to map out the likely extent of sanctions that might result from Russia recognizing the breakaway Luhansk and Donetsk regions of Ukraine, although Putin did not reportedly inform them of his plans for a full-scale war on Ukraine. A presentation delivered by Herman Gref, CEO of state-owned Sberbank, warned of dire economic consequences, although they did not predict the freeze of the central bank’s reserves held abroad, which has affected around half of the $600 billion total.77 This severe miscalculation shows that, despite technocratic preparations, it would seem wrong to primarily credit these with the failure of sanctions on Russia. Nor can their failure be attributed primarily to the opportunistic sanctions evasion by various third countries.
Rather, the sanctions have failed to impact Russia’s finances, war effort, or civilian economy because of the existence of an alternative full-stack advanced manufacturing base in China that has remained open to Russia and has supplied Russia with all kinds of manufactured goods it could not build itself. Even if Russia cleverly insulated its finances, found buyers for hydrocarbons, and evaded sanctions on an unprecedented scale, if it was unable to import a wide range of manufactured physical goods from anywhere, both its military-industrial base and consumer economy would suffer immediately visible consequences in the forms of shortages of key parts, consumer goods, and industrial components, since it would be unlikely if not impossible for Russia to build up the industrial base to produce all these itself in so short a span of time.
Such an alternative advanced manufacturing base arguably did not exist as recently as the 2000s and most certainly did not exist in the 1980s when Iran became the largest country to be heavily sanctioned by the U.S., Europe, Japan, and South Korea. Cut off from such imports and expertise, most countries would simply stagnate economically as their industrial bases slowly decayed, as in Iran. But as of the 2020s, a country is no longer cut off from modern technology if it is cut off from the U.S.-led world, so long as it retains open trade with China. For many niche and high-end products or components, like the most advanced semiconductors or large aircraft, China still lags behind the U.S., Taiwan, or South Korea, so it is not yet a perfect substitute. But it now appears to be enough of a substitute to stabilize a modern wartime economy of 150 million people, and China’s industrial sophistication will only continue to grow.
Samo Burja, “The First World Government,” Palladium Magazine, March 1, 2024, https://www.palladiummag.com/2024/03/01/the-first-world-government.
“Where does the EU's gas come from?” European Council, March 8, 2024, https://www.consilium.europa.eu/en/infographics/eu-gas-supply; “Sanctions on energy,” European Commission, https://eu-solidarity-ukraine.ec.europa.eu/eu-sanctions-against-russia-following-invasion-ukraine/sanctions-energy_en.
“EU sanctions against Russia explained,” European Council, https://www.consilium.europa.eu/en/policies/sanctions/restrictive-measures-against-russia-over-ukraine/sanctions-against-russia-explained/#individual.
Sam Fleming et al. “IMF raises Russia growth outlook as war boosts economy,” Financial Times, January 30, 2024, https://www.ft.com/content/21a5be9c-afaa-495f-b7af-cf937093144d; Darya Korsunskaya, and Alexander Marrow, “Russia's GDP boost from military spending belies wider economic woes,” Reuters, February 7, 2024, https://www.reuters.com/world/europe/russias-gdp-boost-military-spending-belies-wider-economic-woes-2024-02-07.
“S&P Global forecasts 8.5% contraction in Russia's economy in 2022.” Reuters, March 28, 2022, https://www.reuters.com/article/ukraine-crisis-russia-s-p-idUKKCN2LP21T; Pierre Gourinchas, “World Economic Outlook, April 2022: War Sets Back The Global Recovery,” International Monetary Fund, April 19, 2022, https://www.imf.org/en/Publications/WEO/Issues/2022/04/19/world-economic-outlook-april-2022.
Richard Lough, “French minister declares economic 'war' on Russia, and then beats a retreat,” Reuters, March 1, 2022, https://www.reuters.com/world/france-declares-economic-war-against-russia-2022-03-01.
Andrew Feinberg and Justin Vallejo, “White House says Russia's financial system is 'near the brink of collapse,'” The Independent, April 6, 2022, https://www.independent.co.uk/news/world/americas/russia-financial-collapse-sanctions-psaki-b2051688.html.
Elena Fabrichnaya, and Guy Faulconbridge, “What and where are Russia's $300 billion in reserves frozen in the West?,” Reuters, December 28, 2023, https://www.reuters.com/world/europe/what-where-are-russias-300-billion-reserves-frozen-west-2023-12-28.
“Energy Fact Sheet: Why does Russian oil and gas matter? – Analysis - IEA.” IEA 50, March 21, 2022, https://www.iea.org/articles/energy-fact-sheet-why-does-russian-oil-and-gas-matter.
“Sanctions on energy,” European Commission, https://eu-solidarity-ukraine.ec.europa.eu/eu-sanctions-against-russia-following-invasion-ukraine/sanctions-energy_e.
“Where does the EU's gas come from?” European Council, March 8, 2024, https://www.consilium.europa.eu/en/infographics/eu-gas-supply.
Ibid.
Fedoseev, Szymon Kardaś, “Own goal: How Russia's gas war has backfired,” European Council on Foreign Relations, July 27, 2023, https://ecfr.eu/article/own-goal-how-russias-gas-war-has-backfired.
“Where does the EU's gas come from?” European Council, March 8, 2024, https://www.consilium.europa.eu/en/infographics/eu-gas-supply.
“Russian Oil Price Cap update: Reporting requirements and Evasion alert,” The Swedish Club, May 3, 2023, https://www.swedishclub.com/news/circulars/russian-oil-price-cap-update-reporting-requirements-and-evasion-alert.
“EU sanctions against Russia explained,” European Council, https://www.consilium.europa.eu/en/policies/sanctions/restrictive-measures-against-russia-over-ukraine/sanctions-against-russia-explained/#individual.
“Russia Export Controls,” BIS.doc.gov, February 23, 2024, https://www.bis.doc.gov/index.php/2011-09-14-14-10-06/russia-export-controls.
“EU sanctions against Russia explained,” European Council, https://www.consilium.europa.eu/en/policies/sanctions/restrictive-measures-against-russia-over-ukraine/sanctions-against-russia-explained/#individual.
Isaac Levi et al. “December 2023 — Monthly analysis on Russian fossil fuel exports and sanctions,” Centre for Research on Energy and Clean Air, January 23, 2024, https://energyandcleanair.org/december-2023-monthly-analysis-on-russian-fossil-fuel-exports-and-sanctions.
Kandy Wong, “China wielding ‘bargaining power’ with Russia over Power of Siberia 2 natural gas pipeline,” South China Morning Post, November 24, 2023, https://www.scmp.com/economy/global-economy/article/3242612/china-wielding-bargaining-power-russia-over-power-siberia-2-natural-gas-pipeline.
“Russia's Oil And Gas Budget Revenues Grew By 28% In 2022,” Enerdata, January 17, 2023, https://www.enerdata.net/publications/daily-energy-news/russian-oil-gas-revenues-increase.html.
“Brief Annual Information On Federal Budget Execution (Bln. Rub.),” The Ministry Of Finance Of The Russian Federation, February 27, 2024, https://minfin.gov.ru/en/statistics/fedbud/?id_65=119255-annual_report_on_execution_of_the_federal_budget_starting_from_january_1_2006.
“Fuel And Energy Export Value By Source Russia,” Statista, September 4 2023, https://www.statista.com/statistics/1029431/russia-fuel-and-energy-export-value-by-source; Isaac Levi, “December 2023 — Monthly analysis on Russian fossil fuel exports and sanctions – Centre for Research on Energy and Clean Air.” Centre for Research on Energy and Clean Air, January 23, 2024, https://energyandcleanair.org/december-2023-monthly-analysis-on-russian-fossil-fuel-exports-and-sanctions.
Isaac Levi, “December 2023 — Monthly analysis on Russian fossil fuel exports and sanctions – Centre for Research on Energy and Clean Air.” Centre for Research on Energy and Clean Air, January 23, 2024, https://energyandcleanair.org/december-2023-monthly-analysis-on-russian-fossil-fuel-exports-and-sanctions.
“Average Russian oil exports by country and region, 2021-2023 – Charts – Data & Statistics,” IEA 50, https://www.iea.org/data-and-statistics/charts/average-russian-oil-exports-by-country-and-region-2021-2023.
John Hardie, “Russian Munitions Production Higher But Still Insufficient,” FDD, January 18, 2024, https://www.fdd.org/analysis/op_eds/2024/01/18/russian-munitions-production-higher-but-still-insufficient.
Jack Watling and Nick Reynolds, “Russian Military Objectives and Capacity in Ukraine Through 2024,” RUSI, February 13, 2024, https://www.rusi.org/explore-our-research/publications/commentary/russian-military-objectives-and-capacity-ukraine-through-2024.
Richard Thomas, “UK MoD: current Russian tank loss rate in Ukraine war sustainable,” Army Technology, January 30, 2024, https://www.army-technology.com/news/uk-mod-current-russian-tank-loss-rate-in-ukraine-war-sustainable.
“Setting Transatlantic Defence up for Success,” Republic of Estonia Ministry of Defence, December 13, 2023, https://kaitseministeerium.ee/sites/default/files/setting_transatlantic_defence_up_for_success_0.pdf.
Agathe Demarais, “Don't Trust Russia's Economic Numbers,” Foreign Policy, March 13, 2023, https://foreignpolicy.com/2023/03/13/russia-economy-sanctions-gdp-war-ukraine-disinformation-statistics; “Russia’s energy consumption rises by 1.3% in 2023,” TASS, March 2, 2023, https://tass.com/economy/1584207.
Max Seddon and Polina Ivanova, “How Putin's technocrats saved the economy to fight a war they opposed,” Financial Times, December 15, 2022, https://www.ft.com/content/fe5fe0ed-e5d4-474e-bb5a-10c9657285d2.
Including during a speech to the IMF in 2018.
“The list of Annual Michel Camdessus Central Banking Lectures,” International Monetary Fund, 2023, https://www.imf.org/en/News/SPROLLs/Camdessus-Lectures.
“Russian de-dollarisation.” ING, December 3, 2020, https://think.ing.com/uploads/reports/Russian_dedollarisation_November_2020_%28RB%29.pdf.
“National Payment System.” Bank of Russia, https://www.cbr.ru/eng/psystem; “Банки увидели рост доли карт «Мир» после ухода Visa и Mastercard,” РБК, April 5, 2022, https://www.rbc.ru/finances/05/04/2022/624af59d9a7947f4980f2366?from=from_main_1.
Pjotr Sauer, “Russia's central bank to hold extraordinary meeting after rouble falls to 16-month low,” The Guardian, August 14, 2023, https://www.theguardian.com/business/2023/aug/14/rouble-falls-to-16-month-low-dollar-russian-exports-collapse-war-ukraine-russia-economy.
Data from Koyfin.
“China-Russia 2023 trade value hits record high of $240 bln - Chinese customs,” Reuters, January 11, 2024, https://www.reuters.com/markets/china-russia-2023-trade-value-hits-record-high-240-bln-chinese-customs-2024-01-12.
“China-Russia trade rises 34.3% to $190 billion in 2022, a new record high,” Global Times, January 13, 2023, https://www.globaltimes.cn/page/202301/1283761.shtml.
Niels Graham, “Chinese exports have replaced the EU as the lifeline of Russia's economy,” Atlantic Council, February 22, 2024, https://www.atlanticcouncil.org/blogs/econographics/chinese-exports-have-replaced-the-eu-as-the-lifeline-of-russias-economy.
Keith Bradsher, “How China Is Profiting From Trade With Russia,” The New York Times, December 21, 2023, https://www.nytimes.com/2023/12/21/business/china-russia-trade.html; Denis Kasyanchuk, “How Russia uses China to get round sanctions,” The Bell, February 20, 2024, https://en.thebell.io/how-russia-uses-china-to-get-round-sanctions.
“Russia's new car sales recover to 1.06 million units in 2023,” Reuters, January 10, 2024, https://www.reuters.com/business/autos-transportation/russias-new-car-sales-recover-106-million-units-2023-2024-01-10.
Ibid.
Hugo von Essen, “Russia-China Economic Relations Since the Full-Scale Invasion of Ukraine,” Sceeus, July 5, 2023, https://sceeus.se/publikationer/russia-china-economic-relations-since-the-full-scale-invasion-of-ukraine; Denis Kasyanchuk, “How Russia uses China to get round sanctions,” The Bell, February 20, 2024, https://en.thebell.io/how-russia-uses-china-to-get-round-sanctions.
“Chinese devices account for 79 pct of Russia's total smartphone imports in 2023: study,” XinhuaNet, February 21, 2024, https://english.news.cn/20240221/43376c63c9ca4eedbdd1b9a6ebdad783/c.html; “Number of smartphones sold in Russia 2022,” Statista, February 3, 2023, https://www.statista.com/statistics/1122728/number-of-smartphones-sold-in-russia.
Hugo von Essen, “Russia-China Economic Relations Since the Full-Scale Invasion of Ukraine,” Sceeus, July 5, 2023, https://sceeus.se/publikationer/russia-china-economic-relations-since-the-full-scale-invasion-of-ukraine; Denis Kasyanchuk, “How Russia uses China to get round sanctions,” The Bell, February 20, 2024, https://en.thebell.io/how-russia-uses-china-to-get-round-sanctions.
“Chinese devices account for 79 pct of Russia's total smartphone imports in 2023: study,” XinhuaNet, February 21, 2024, https://english.news.cn/20240221/43376c63c9ca4eedbdd1b9a6ebdad783/c.html; “Number of smartphones sold in Russia 2022,” Statista, February 3, 2023, https://www.statista.com/statistics/1122728/number-of-smartphones-sold-in-russia.
Dan Strumpf, “Chinese Tech Giants Quietly Retreat From Doing Business With Russia,” The Wall Street Journal, May 6, 2022, https://www.wsj.com/articles/chinese-tech-giants-quietly-stop-doing-business-with-russia-11651845795.
Hugo von Essen, “Russia-China Economic Relations Since the Full-Scale Invasion of Ukraine,” Sceeus, July 5, 2023, https://sceeus.se/publikationer/russia-china-economic-relations-since-the-full-scale-invasion-of-ukraine
Karen Gilchrist, “How surging trade with China is boosting Russia's war,” CNBC, September 28, 2023, https://www.cnbc.com/2023/09/28/how-surging-trade-with-china-is-boosting-russias-war.html.
Hugo von Essen, “Russia-China Economic Relations Since the Full-Scale Invasion of Ukraine,” Sceeus, July 5, 2023, https://sceeus.se/publikationer/russia-china-economic-relations-since-the-full-scale-invasion-of-ukraine
Ibid.
Ibid.
“Turn to the East: China's cargo flow to Russia in 2023 and challenges to the transport system,” Eurasian Rail Alliance Index, November 29, 2023, https://index1520.com/en/analytics/povorot-na-vostok-gruzopotok-kitaya-v-rossiyu-v-2023-godu-i-vyzovy-transportnoy-sistemy; Denis Kasyanchuk, “How Russia uses China to get round sanctions,” The Bell, February 20, 2024, https://en.thebell.io/how-russia-uses-china-to-get-round-sanctions.
“China secretly sends enough gear to Russia to equip an army,” POLITICO.eu, July 24, 2023, https://www.politico.eu/article/china-firms-russia-body-armor-bullet-proof-drones-thermal-optics-army-equipment-shanghai-h-win.
Ibid.
Markus Garlauskas et al. “China's support for Russia has been hindering Ukraine's counteroffensive,” Atlantic Council, November 15, 2023, https://www.atlanticcouncil.org/blogs/new-atlanticist/chinas-support-for-russia-has-been-hindering-ukraines-counteroffensive.
Ibid.
Matthias Williams, and John O'Donnell, “Ukraine says it is finding more Chinese components in Russian weapons,” Reuters, April 14, 2023, https://www.reuters.com/world/europe/ukraine-says-it-is-finding-more-chinese-components-russian-weapons-2023-04-14.
Hugo von Essen, “Russia-China Economic Relations Since the Full-Scale Invasion of Ukraine,” Sceeus, July 5, 2023, https://sceeus.se/publikationer/russia-china-economic-relations-since-the-full-scale-invasion-of-ukraine.
Ian Talley, and Anthony DeBarros, “China Aids Russia's War in Ukraine, Trade Data Shows - WSJ.” The Wall Street Journal, February 4, 2023, https://www.wsj.com/articles/china-aids-russias-war-in-ukraine-trade-data-shows-11675466360?st=z6hd5o0q4zouu0f.
Henry Foy, “Russia is increasingly using China's currency to evade sanctions,” Financial Times, September 27, 2023, https://www.ft.com/content/f1347042-cb5c-40d8-ac81-5bbc85542abd.
Elena Fabrichnaya and Alexander Marrow, “China's yuan ousts dollar to become most traded currency in Moscow in 2023,” Reuters, January 16, 2024, https://www.reuters.com/markets/currencies/chinas-yuan-ousts-dollar-become-most-traded-currency-moscow-2023-2024-01-16.
Maxim Chupilkin Beata Javorcik et al. “Exorbitant privilege and economic sanctions.” EBRD, https://www.ebrd.com/publications/working-papers/exorbitant-privilege-and-economic-sanctions.
Markus Garlauskas et al. “China's support for Russia has been hindering Ukraine's counteroffensive,” Atlantic Council, November 15, 2023, https://www.atlanticcouncil.org/blogs/new-atlanticist/chinas-support-for-russia-has-been-hindering-ukraines-counteroffensive.
Clarence Leong and Liza Lin, “Russia's Backdoor for Battlefield Goods From China: Central Asia,” The Wall Street Journal, March 4, 2024, https://www.wsj.com/world/russias-backdoor-for-battlefield-goods-from-china-central-asia-bd88b546.
“EU trade with Russia - latest developments - Statistics Explained,” European Commission, February 20, 2024, https://ec.europa.eu/eurostat/statistics-explained/index.php?oldid=558089#Latest_developments.
Data from the German Federal Statistical Office https://www-genesis.destatis.de/genesis/online?language=en&sequenz=statistikTabellen&selectionname=51000#abreadcrumb
Robin Brooks and Simon Johnson, “Opinion: Putin's silk road around sanctions,” The Kyiv Independent, February 29, 2024, https://kyivindependent.com/opinion-putins-silk-road-around-sanctions.
Ibid.
Gary Dixon, “Secretive tanker shipowner Gatik breaks silence to blame media controversies for 'losses,'” TradeWinds, August 24, 2023, https://www.tradewindsnews.com/tankers/secretive-tanker-shipowner-gatik-breaks-silence-to-blame-media-controversies-for-losses-/2-1-1506164.
Sukalp Sharma, “Russia shadow fleet king Gatik sinks on paper, transfers all tankers to related companies,” The Indian Express, August 21, 2023, https://indianexpress.com/article/business/russia-shadow-fleet-king-gatik-sinks-on-paper-transfers-all-tankers-to-related-companies-8901462.
Shweta Sharma, “Europe buying Russian oil via India at record rates in 2023 despite Ukraine war,” The Independent, January 12, 2024, https://www.independent.co.uk/news/world/europe/russia-oil-europe-india-ukraine-war-b2477443.html.
Analyst estimate based on analyst calculations using trade data.
Adam Samso, et al. “Turkey's exports of military-linked goods to Russia soar,” Financial Times, November 27, 2023, https://www.ft.com/content/1cef6628-32eb-49c9-a7f1-2aef9bce4239; Can Sezer et al. “Exclusive: Turkish-Russian trade hit by fresh US sanctions threat,” Reuters, February 19, 2024, https://www.reuters.com/markets/turkish-russian-trade-hit-by-fresh-us-sanctions-threat-2024-02-19.
“GDP (current US$) | Data,” World Bank Open Data, https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?most_recent_value_desc=true.
Max Seddon and Polina Ivanova, “How Putin's technocrats saved the economy to fight a war they opposed,” Financial Times, December 15, 2022, https://www.ft.com/content/fe5fe0ed-e5d4-474e-bb5a-10c9657285d2.